Settling on your first investment property is exciting, but it also signs you up for a set of tax rules that catch out plenty of first-time landlords. The good news: once you understand a handful of basics, claiming what you are entitled to becomes routine rather than stressful. Get it right from the very first month and you will avoid the unpleasant surprises that show up years later, especially when you eventually sell.
Here is what every new rental investor should understand before lodging that first return with a property in it.
The holding costs you can generally claim
The ongoing costs of owning and renting out a property are generally deductible against the rent you receive. If those deductions exceed your rental income, the loss may reduce the tax on your other income too. Common deductible holding costs include:
- Interest on the loan used to buy the property (the interest portion of your repayments, not the principal)
- Council rates, water rates and land tax
- Building and landlord insurance
- Property management and letting fees charged by your agent
- Repairs and maintenance to keep the property in working order
- Smaller running costs such as advertising for tenants, cleaning, gardening, pest control and body corporate fees
A key word above is genuinely. You can only claim costs for periods the property was rented or genuinely available for rent. If you take it off the market, keep it vacant for your own use, or only ever advertise it at an unrealistic rent, the ATO can deny deductions for those periods. Keep evidence that the property was actively and realistically advertised.
Repairs versus improvements: the trap
This is the single biggest source of confusion for new investors, and getting it wrong can mean claiming a deduction in the wrong year.
A repair restores something that has broken or worn out through use while the property was rented. Fixing a leaking tap, replacing a few broken roof tiles, or repainting a tired wall is generally a repair, and it is usually deductible in full in the year you pay for it.
An improvement is different. It makes the property better than it was, or replaces something entirely with a superior version. Examples include renovating a kitchen, adding a carport, or replacing the whole roof rather than patching it. Improvements are capital in nature, so you generally cannot claim them all at once. Instead, they are written off gradually over time as capital works or depreciation.
One more catch: work you do to fix problems that existed when you bought the property (often called initial repairs) is treated as capital, even if it looks like a repair. So that pre-existing crack you patched in the first week is usually not an immediate deduction.
Depreciation: deductions you do not pay for each year
Beyond cash costs, the property itself can generate deductions through depreciation. There are generally two parts:
- Capital works, broadly the building structure and fixed items, which are typically written off over many years
- Plant and equipment, the removable assets inside such as carpets, blinds, ovens and air conditioners, which depreciate over their effective lives
Rules around second-hand plant and equipment in established residential properties have tightened in recent years, so what you can claim depends on the property and when you bought it. A depreciation schedule prepared by a qualified quantity surveyor sets all of this out correctly and often uncovers deductions owners did not know they had. Its cost is generally deductible too.
Keep records from day one for CGT
When you eventually sell, capital gains tax applies to the profit. If you have owned the property for more than 12 months, you may be entitled to the 50% CGT discount on the gain. The size of that gain depends heavily on records you should be keeping from the start.
Your cost base, the figure used to work out the gain, includes more than the purchase price. It can include items such as stamp duty, legal and conveyancing fees, and certain capital improvements over the years. Without records, you cannot prove these costs and may pay more CGT than necessary. From settlement onward, keep:
- The purchase contract, settlement statement and stamp duty records
- Loan documents and annual interest statements
- Every expense receipt and your agent's annual income and expenses summary
- Invoices for repairs, improvements and any depreciation schedule
- Dates the property was advertised, rented or vacant
Good records protect you at both ends: accurate deductions each year, and a correctly calculated gain when you sell. The ATO generally expects you to keep records for five years after you lodge, and for CGT purposes, five years after the sale.
Where to start
You do not need to memorise every rule. You do need a tidy system from the first month and someone to prepare your rental schedule properly so repairs, improvements and depreciation land in the right place. That is exactly the kind of work we do for first-time investors every tax season.
Book a chat at nebulaaccounting.au or call 0433 822 227.
This article is general information only and does not take account of your personal circumstances — it is not personal tax, financial or legal advice. Tax laws change and apply differently to different people. Nebula Accounting Pty Ltd is a registered tax agent (No. 26259377); please speak with us or check with the ATO before acting.